54 Pages Posted: 20 Dec 2015 Last revised: 6 Feb 2018
Date Written: November 30, 2017
We show that investors derive utility from non-pecuniary characteristics of investments by studying impact funds, defined as venture or growth equity funds with dual objectives of generating financial returns and positive externalities. Impact funds earn internal rates of return that are 4.7% less than traditional VC funds in reduced form regressions. Based on estimates of a willingness to pay (WTP) model derived from a utility framework, investors accept 3-4% lower returns for impact funds. Development organizations, banks, and public pension funds have the greatest WTP; endowments and private pensions have negligible WTP. Europeans and UNPRI signatories have larger WTPs. Mapping WTP to investor preferences for and hindrances against impact investing, we find that mission-oriented objectives and political pressure to invest locally increase the WTP for impact and legal restrictions (e.g. ERISA) decrease it.
Keywords: venture capital; private equity; impact investment; socially responsible investment; UN principles of responsible investment (PRI); sustainable investing; corporate social responsibility; local bias; banks; public pension funds; willingness to pay; random utility over externalities
JEL Classification: G11, G21, G22, G23, G24, G28, H41, M14
Suggested Citation: Suggested Citation